Articles by Practice Area
Making an Apology
Parties in conflict and disputes rarely apologize to one another. No one wants to admit liability, and saying sorry is often seen as an admission of liability.
On 13 July 2017, the Legislative Council of Hong Kong passed the Apology Bill (soon to be the Apology Ordinance) to enable parties to apologize without fear of legal implications.
Historically, an apology is seen to be an implied admission of fault and/or liability. Such apology, whether written or oral, may constitute evidence of liability in civil proceedings.
Parties in dispute are therefore constantly advised by lawyers not to apologize for their actions, even if the party is in the wrong. The fear of legal implications overrode morality and common decency.
The Apology Ordinance
Under the Apology Ordinance, an apology is defined as an expression of regret, sympathy or benevolence. The apology need not be in writing. It can be oral or by conduct.
If a party has apologized, the Apology Ordinance provides that the fact of that apology will not constitute an express or implied admission of the person’s fault or liability and must not be taken into account in determining fault, liability or any other issue in connection with the matter to the prejudice of the person.
While evidence of an apology made by a person is not normally admissible as evidence for determining fault, the Apology Ordinance makes an exception. The exception is this:
If there is no other evidence available for determining an issue, it is possible for statements of fact contained in an apology to be admitted as evidence in the proceedings, provided that it is just and equitable to do so.
The following example may trigger the exception. One party may say to another:
“I am sorry about what has happened”
The above would not normally be admissible as evidence on liability. However, the situation may be different if the party apologizing goes on to say the following:
“The goods were not delivered to you because we had inadequate staff on that day.”
The above might be admissible as evidence even if the apology itself is not, particularly if the fact of adequate or inadequate staff became a relevant issue in civil proceedings and this was the only piece of evidence available in the proceedings. Clearly, this exception means that parties should take great care in how they apologize and what they should include in their apology.
The Apology Ordinance also has potential impact upon insurance coverage.
Section 10 of the Apology Ordinance provides that an apology does not render void or affect any insurance cover, compensation or other form of benefit for any person in connection with the matter. There is also an express prohibition against attempting to “contract out” of this section by, for example, a disclaimer or waiver of rights. This section also takes effect whether or not the contract of insurance was entered into before or after the commencement date of the Apology Ordinance.
Liability insurance policies typically contain conditions that an insured party shall not make any admissions of liability or prejudice the claim without the insurer’s prior consent. While Section 10 may avoid an admission of liability, potential problems may arise if the insured prejudices the claim by making an apology which contains facts that are later ruled as admissible by the Court for the reasons set out above. In such circumstances, there may be argument as to whether the additional facts appended to the apology can properly be regarded as being part and parcel of the apology itself.
When Will It Take Effect?
It is currently unclear as to the commencement date of the Apology Ordinance although it is expected to come into effect later this year (2017) or early next year (2018).
With the implementation of the Apology Ordinance, being the first jurisdiction in Asia to do so, Hong Kong is leading and consolidating its position as one of the foremost centers in the Asia region for mediation and dispute resolution.
Although similar legislations have been passed in the United States, Canada, Australia and the United Kingdom, only time will tell whether the Apology Ordinance will influence parties in Hong Kong to more readily apologise to each other for wrongful conduct.
What should be quite clear however is that making an apology is not all without its risks and parties should continue to take proper legal advice before doing so.
The Provisional Insurance Authority ( the ‘PIA’) is already in action and has just written to the Chief Executives of all authorized insurers (‘Insurers’). The communication covers two Guidance Notes ( previously ‘GN’ and now ‘GL’). Here we will focus only on one in summarizing what the PIA had to say in their letter.
GL4: Guideline on 'Fit and Proper' Criteria
New section 14A of the Insurance Ordinance will be effective on 26 June 2017. Section 14A sets out a list of matters that the Insurance Authority (the "IA") must have regard to when determining whether a person is 'fit and proper'. This is a new section which is applicable to controllers, directors, key persons in control functions and appointed actuaries of all Insurers. GL4 sets out the minimum standard of suitability requirements for these persons.
Transitional Arrangements for Key Persons in Control Functions:
Some Insurers may currently maintain one or more control functions and certain individuals may have been responsible for one or more of these control functions prior to 26 June 2017.
The IA shall introduce the following transitional arrangements effective 26 June 2017:
- For individuals who are responsible for any of the control functions of an Insurer before 26 June 2017 and within the definition of 'key persons in control functions' (the "Appointed Individuals"), relevant Insurers are required to submit applications for the IA's approval of their proposed appointments on 26 June 2017. Such applications must be submitted to the IA during the period from 26 June 2017 to 30 September 2017.
- They should be provided in the prescribed Form A1
- Application fees: HK$18,000 will be waived in respect of applications of the Appointed Individuals.
- The IA will consider and will notify the insurers of the application results as soon as practicable.
Transitional arrangements apply to the Appointed Individuals only. If an Insurer wishes to appoint an individual as a key person in any control function(s) on or after 26 June 2017, it must obtain the IA's prior approval.
For controllers, directors and appointed actuaries of Insurers who have already been duly appointed prior to 26 June 2017 in accordance with the relevant requirements, they are not required to seek the IA's re-approval. However, if an Appointed Individual assumes a dual role of both an appointed actuary and a key person in the actuarial function, approval will still be required.
Effective on June 26, 2017 (“D-day”), the Hong Kong independent Insurance Authority (“IA”), will take over the duties of the existing Office of the Commissioner of Insurance (“OCI”) relative to the regulation of authorised insurers in Hong Kong, and the OCI will be disbanded. This take-over has been two years in the making, starting with enactment of the Insurance Companies (Amendment) Ordinance 2015 (“ICAO 2015”) in July, 2015.
The ICAO 2015 provided for a three stage transition under which a new regulator (independent of industry and the government) would take over the OCI’s functions, and assume and exercise new statutory powers over both insurance companies and insurance intermediaries. D-day marks the completion of the second stage, with the IA replacing the OCI to take over the regulation of authorised insurers. Thereafter, the IA is expected to take over the licensing and regulation of insurance intermediaries from the three intermediary self-regulatory organisations within 2 years from D-day, completing the third stage of reform.
IA Governance Structure
Under the ICAO 2015, the IA comprises of the following members appointed by the Chief Executive:
- A Chairperson who is a non-executive director (“NED”);
- A CEO who is an executive director (“ED”); and
- No less than 6 other EDs or NEDs, with the number of NEDs exceeding the number of EDs.
Effective on December 28, 2015, Dr. Moses Cheng was appointed as Chairman of the IA and seven NEDs with relevant industry/professional/occupational experience) were also appointed. Subsequently, on May 5, 2017, Mr. John Leung Chi-yan, the incumbent Commissioner of Insurance, was appointed as CEO of the IA for one year from June 26, 2017 to June 25, 2018. According to the Secretary for Financial Services and the Treasury, secondment of Mr. Leung to the IA for one year “will ensure a smooth transition while allowing more time for the IA to search for a suitable candidate to fill the CEO post”. Concurrent with Mr. Leung’s appointment, 4 EDs were also appointed for 3-year terms pursuant to a selection process chaired by the Chairman of the IA.
New Fees and Charges
Some of the more immediate repercussions of the commencement of regulation by the IA are increased annual authorization fees and new user fees on specific IA services which will be in effect from D-day onwards, including the following:
- Annual authorization fees payable by authorized insurers increased from current rates (e.g. HK$227,300 for long-term/general business) to a higher fee consisting of: i) a fixed fee (e.g. HK$300,000 for long-term/general business), and ii) a variable fee of up to 0.0039% on insurance liabilities to be phased in over 6 years, subject to a variable fee cap of HK$7 million annually.
- Application fee for approval of the appointment of a controller/director/key person in control function under section 13A or 13B or an actuary under section 15(3A) of the Insurance Ordinance: HK$18,000 per application
- Notification fee to propose a person to become a controller (i.e. person with/controlling at least 15% of the voting power at any general meeting of the insurer): HK$100,000 per notification where proposed controller holds/controls 50% or more of the voting power; or HK$50,000 per notification otherwise.
These fees are consistent with the long-term objective that the IA will finance its own operations and become financially independent of the government. To the same end, in addition to collecting authorization and user fees from insurance companies/users of IA services, the IA is also empowered under the ICAO 2015 to collect a levy on insurance premiums from policyholders. It is expected that this levy will be implemented by January 1, 2018.
Notifications and Approvals
To tie in with the ICAO 2015 provisions relating to IA approval of directors and key persons in control functions (as well as controllers) as “fit and proper persons” to be appointed, amended forms have been prescribed for use after D-day for submitting particulars in respect of those proposed to be appointed to such roles at an authorised insurer. Under the ICAO 2015, “key persons in control functions” include those who are responsible for any of the following functions who exercise a “significant influence” on the insurer’s business:
- risk management;
- financial control;
- internal audit;
- actuarial; and
- intermediary management.
Notably, the amended forms request additional particulars of the reporting structure or reporting lines that the director/key person in control functions has in relation to people within the insurer, people at the insurer’s head office and/or people at the insurer’s parent company (as appropriate).
While the IA approval requirements on their face seem to apply only to appointments made after D-day, the IA has now announced transitional arrangements whereby appointments of key persons made by authorised insurers prior to D-day must nonetheless be approved by the IA after the fact. However, the application fee for approval of those individuals has been waived.
Investigation & Displinary Powers
On D-day, a majority of the provisions of the ICAO 2015 will come into effect, at least as they pertain to the regulation of authorised insurers. These include the new regulatory powers conferred on the IA to conduct inspections and investigations relative to authorised insurers without a warrant; and greater disciplinary powers of the IA, including the power to impose a pecuniary penalty for misconduct of up to the greater of HK$10,000,000 or three times the amount profit gained/loss avoided by the insurers as a result of the misconduct. In the near future, it is expected that the IA will issue a new guideline (GL18) setting out the considerations in exercising its power to impose the pecuniary penalty.
With the commencement of the new regulatory regime under the IA on D-day, authorised insurers in Hong Kong must implement policies and processes to ensure compliance with the new regulatory requirements, including “fit and proper” assessments of controllers, directors and key persons in control functions and notifying the IA of new appointments. Insurers will need to stay current on regulatory developments, which will include issuance by the IA of an updated guideline on “fit and proper” criteria (GL4) to replace existing Guidance Note 4. Meanwhile, the IA is expected to push ahead with other regulatory reforms including a risk-based capital framework for insurers and a policyholders’ protection fund initiative. The Hong Kong insurance industry must brace itself for significant challenges and higher costs of compliance in adjusting to the new regulatory landscape.
http://www.fstb.gov.hk/fsb/ppr/press/doc/pr05052017a_e.pdf [IA Appointments Press Release dated May 5, 2017]
http://www.fstb.gov.hk/fsb/ppr/press/doc/pr19042017a_e.pdf [D-day Press Release dated April 19, 2017]
http://www.fstb.gov.hk/fsb/iia/eng/establishment/doc/iia-lb-190417_e.pdf [Legco Brief]
http://www.legco.gov.hk/yr16-17/english/subleg/negative/2017ln058-e.pdf [Insurance Companies (Authorization and Annual Fees) (Amendment) Regulation 2017]
http://www.legco.gov.hk/yr16-17/english/subleg/negative/2017ln057-e.pdf [Insurance Companies (Register of Insurers) (Prescribed Fee) (Amendment) Regulation 2017]
http://www.gld.gov.hk/egazette/pdf/20151929/es12015192912.pdf [ICAO 2015]
About OLN’s Insurance Practice Group
OLN’s Insurance Practice Group has direct experience of the legal, regulatory and practical challenges facing insurers and reinsurers throughout Asia region. Members of our Group have worked in the insurance industry and have extensive experience working in and advising insurers and reinsurers on contractual and regulatory matters and risk management issues relevant to their businesses. We have particular expertise in the review and drafting of contractual documentation relating to insurance and reinsurance activities, including the development of policy wording for life, accident, medical and health insurance products, and the review and vetting of related proposals, product brochures and training materials. We also have experience advising on disputes over coverage for claims under both life and general insurance policies, and with support from OLN’s Dispute Resolution Group, are well placed to represent clients in all aspects of insurance litigation.
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The establishment of an independent insurance authority (IIA) in Hong Kong has been six years in the making, starting with a public consultation in July 2010. This culminated in the enactment of the Insurance Companies (Amendment) Ordinance 2015. The policy objective of the reform, including the establishment of the IIA (which is expected to take over the regulation of authorized insurers early next year), is to promote public confidence in the insurance industry and enhance customer protection by, among other things, improving the corporate governance and financial soundness of insurers in Hong Kong.
Authorized Insurers (of which there are currently 161 in Hong Kong) have new corporate governance guidance standards to meet by 1 January 2017 (delayed requirements excepted). Overseas authorized insurers with over 50% of their gross premium income derived from Hong Kong insurance business are included in this group (with an exemption if they are already subject to comparable regulation standards). In particular, Guidance Note (“GN”) 10 issued by the Office of the Commissioner of Insurance (“OCI”), the current regulator of the authorized insurers in Hong Kong, sets out the corporate governance standards to be met.
GN10 – Corporate Governance
GN 10 was recently amended by the OCI in October 2016 to enhance the corporate governance requirements for authorized insurers, highlights of which include the following:
-at least one third of the board to be independent non-executive directors;
-the roles of Chairman and Chief Executive to be separated;
-key persons to be appointed for control functions, including actuarial, financial control, internal audit, compliance, risk management and intermediary management;
-Board to establish an Audit Committee and a Risk Committee and where appropriate, Investment, Nomination, Remuneration, Underwriting, Claims Settlement and Reinsurance Committees should also be established; and
-New requirements regarding remuneration policies and practices covering all directors and employees at authorized insurers, with specific regard to directors, senior management, key persons in control functions and material risk-taking employees.
GN16 – Customer Protection
In the customer protection area, the OCI has also issued new guidance, GN 16 on underwriting long-term business (other than investment-linked Class C business covered by the earlier GN15) on July 30 2015 to impose new requirements aimed at the “fair treatment of customers” throughout the product life cycle. GN16 has been effective as of 1 April 2016 for new long-term products, and will be effective as of 1 January 2017 for new and existing policies for current long-term products. GN 16 imposes new and stringent requirements regarding product design, communications, sales and post-sale arrangements for all of these products. It also has ramifications for the remuneration of insurance intermediaries in that indemnity commission, or any standing arrangement that offers advance payment of commission, is now strictly prohibited.
To give real teeth to GN16, the guidance provides that any attempt by Controllers and/or Appointed Actuaries to circumvent the requirements prescribed in GN16 would be regarded as acting in bad faith, such as may
impact their “fit and proper” assessment and render them unacceptable to the OCI and the IIA (when it takes over from the OCI in 2017).
Generally speaking, it is expected that the IIA, which is charged with the duty to promote proper standards of conduct by authorized insurers and licensed intermediaries in Hong Kong, will enforce existing non-statutory codes and guidelines (including under guidance notes in the appropriate case) in furtherance of this duty, using its expanded investigative and disciplinary powers under the Insurance Companies (Amendment) Ordinance. Notably, the IIA has the power under the Ordinance to take disciplinary action against authorized insurers and insurance intermediaries for breach of conduct requirements. In addition to the imposition of fines, the IIA may suspend or revoke an insurer’s authorization to carry on business or an intermediary’s license
The OLN Insight
The introduction of an independent regulator will no doubt lead to more codes of conduct being put in place which will be enforced through a more robust inspection and investigation regime. Further reforms are on the horizon. For example, the Hong Kong government has clearly signalled its intention to implement a risk-based capital framework for insurers and introduce a policyholders’ protection fund in the next few years. These changes bring Hong Kong in line with international supervisory standards and regulatory trends, and should help to promote public confidence in and the stable growth of the Hong Kong insurance industry, as intended by the government.
However, Hong Kong’s insurance industry will face significant challenges in adjusting to the new regulatory landscape. The cost of compliance will be high and it will be difficult in many cases for Hong Kong insurers to meet the stringent new conduct and governance requirements, including notably the enhanced requirements for independent non-executive directors under GN10. Similarly, new conduct requirements for insurers (including those relating to the “fair treatment of customers” GN16) and insurance intermediaries may lead to a change of distribution strategy and/or drive some of the smaller industry participants to consolidate.